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Passing gesture
A client who worked for a hotel chain died recently. He was neither a director nor a shareholder.
The hotel would like to pay a year’s salary of more than £100,000 to his estate or his widow. One complication is that probate is not needed, but if the widow opens an estate bank account she cannot access the money without obtaining probate.
Can Taxation readers assist with the tax implications and advise on whether the payment should be made to the estate or the widow?
Query 19,475 – Hotelier.
Family settlement
Loans by beneficiaries of a discretionary trust.
My client’s parents – who were both UK resident and UK domiciled individuals – set up a discretionary trust in the 1980s.
The trust owns property and all the shares in a private limited company and these sources generate income each year. The beneficiaries of the settlement are the client’s children and grandchildren.
One of the trustees is also a discretionary beneficiary of the settlement and receives a distribution each year. They have also loaned money to the trust and do not charge interest.
Are there any tax implications to consider relating to the loans? And can the loans from the beneficiaries also be interest free?
The trust has also lent money to the limited company that it owns. The company regularly makes transfers to the trust. Again, are there any tax implications to consider or should these payments simply be treated as repayments of the loan?
Finally, the trust has lent money to another trust set up by the same settlors but where the beneficiaries are only the client’s grandchildren. Does this have any tax implications and does interest need to be charged between the two trusts at arm’s length?
I will be grateful for any help that Taxation readers can provide, including any other questions that I might not have considered.
Query 19,476 – Chelsea.
Artificial arrangement
Transfer of a property designed to aid VAT recovery.
PropCo has acquired a commercial property for about £1.2m which it intends to convert into four residential units. These units will then be let to the public and, because the output is VAT exempt, it is understood that VAT charged on the conversion costs (at 5%) cannot be recovered (the company has no other activities).
It has been proposed that a subsidiary, NewCo, is set up. This will be owned wholly by PropCo, to which a first grant of a major interest of the property will be made upon completion of the works. The units will then be let to the public by NewCo.
The aim is to ensure that the transaction qualifies for group relief for both stamp duty land tax and chargeable gains so that no corporation tax or stamp duty land tax liability arises on the transfer and the gain realised. Will this aim be achieved?
Another question is on the VAT input recoverability in light of the ‘internal’ sale to NewCo. Could Taxation readers comment as to the grounds on which HMRC may view the sale transaction as ‘artificial’ and thus clawback the VAT that has been reclaimed?
Any further comments as to the potential pitfalls of such arrangements from a VAT perspective would also be greatly appreciated.
Query 19,477 – Brooks.
Interest earned
Income tax reducer on rents of jointly owned property.
My understanding from reading HMRC’s Property Income Manual at PIM1030 is that joint owners of property who are unmarried can choose how the rental profits are shared for tax purposes. This is after taking any allowable expenditure into account, including the relevant proportion of loan interest.
My questions to Taxation readers are as follows.
- Must the entitlement to the basic rate income tax deduction (derived from the loan interest that cannot be claimed against the income) follow the chosen profit share split?
- Alternatively, is entitlement to the tax relief for loan interest determined by how much interest was actually paid by the individual in question, when the loan is in the name of just one of the joint owners?
- If a property is owned beneficially by an unmarried couple but the legal owner has taken out the mortgage and paid the interest, can the interest or income tax reducer be claimed by the beneficial owners?
To add some context to these questions I am dealing with the following scenarios.
First, a grandparent left a property that was subject to a mortgage to her two grandchildren. Because they were minors, the legal interest is in the name of the grandchildren’s mother and the mortgage is also in her name and she pays the interest. Is there any way that tax relief on those payments can be set against her children’s rental income?
In the second scenario, a couple are thinking of buying a property with their daughter. The property will be subject to a mortgage, but this will be only in the mother’s name. Can the interest be apportioned between the three property owners in the most tax-efficient manner or must it all be claimed by the mother against her income share. And would it make any difference if the parents were not married?
I very much look forward to hearing from Taxation readers.
Query 19,478 – Interested.
